On 13 July 2018, the Court of Amsterdam approveda revised €1.308,5 million class action settlement between Ageas (Fortis’ legal successor) and four claimant organizations ((VEB, Deminor, SICAF and Stichting FortisEffect) concerning allegedly false or misleading statements by Fortis during the financial crisis in 2007 and 2008. In an earlier decision of 16 June 2017, the court had declined to approve the settlement (discussed on this blog here). According to the court, the main reasons for this where the unjustified differences in compensation awarded to “active claimants” (those who filed a legal procedure or registered with any of the claimant organizations) and “non-active claimants” (those who didn’t), as well as the exorbitant fees for the claimant organizations.
After the court’s first decision, the parties reached a new settlement agreementon 12 December 2017, which took into account the court’s criticism and included a €100 million increase in the settlement amount. This time, ConsumentenClaim, one of the most important opponents during the first trial, also supported the agreement. Although the court remained critical for one of the claimant organizations (VEB), the court now approved the settlement and declared it binding on all shareholders that do not opt out within five months. This way, more than ten years after the facts, the shareholders of Fortis will get compensation and Ageas can leave this legacy behind.
The revised settlement agreement
In the revised settlement agreement, the main principles for compensation remained the same (for a more elaborate discussion, see my previous blogpost). Compensation is only available to shareholders who held or bought shares during three different periods in 2007-2008, which correspond to the periods in which the allegedly misleading statements were made. There are also differences in the amount of compensation between these periods, reflecting the differences in the chance of success in a legal proceeding.
In addition, shareholders who bought shares (so-called “buyer shares”) are awarded twice as much compensation under the settlement agreement as shareholders who simply held shares (“holder shares”) during one of the three periods. This reflects the fact that it would be more difficult to prove that the latter shareholders actually suffered a harm in a legal proceeding.
This aspect of the agreement was approved by the court without much discussion, save that the court noted that it is actually questionable whether holder shares should even be entitled to compensation, as it is difficult to see why they would be harmed by misleading statements. Some of the claimants had developed a theory of the loss of a chance to sell their shares at another price and/or another moment. While much can be said on this from the perspective of tort law and compensation theory, I leave this to other scholars, also because the court did not consider this an issue in the end.
The revised settlement agreement also contained some changes on the scope of the release (which is made more specific) and on the structure of the payments (an independent third party will be used). I do not further discuss these issues in this blogpost, and focus instead on the aspects of litigation finance.
A very important change in the settlement agreement related to the distinction between active claimants and non-active claimants. In contrast to the previous settlement agreement, the revised settlement agreement no longer awards a different compensation per share, except for a “cost addition” to compensate for active claimants’ costs. The fees paid directly by Ageas to the claimant organizations, were not altered, but more transparency was given about this aspect and the court spend some time analyzing the fees in its decision. In the end, the court approved both aspects, which it had criticized in its first decision.
The fees paid to the claimant organizations
In its first decision, the Court of Amsterdam had ruled that the fees paid to the claimant organizations exceeded a reasonable estimate of the costs made. It decided that this cast doubt on the ability of the organizations to appropriately represent the interests of the claimants. During the second trial, more transparency was given about these fees. Interestingly, nothing has changed in the fees, but the court has nevertheless approved the revised settlement agreement.
The claimants had argued that the court had no competence to review the fees paid to the claimant organization, as there was no legal basis for this. However, this argument was rejected by the court. It considered that it was without a doubt that the fees for the claimant organizations have played a role in reaching a settlement, even if these negotiations were only conducted after the compensation for the claimants was agreed upon. It also considered that the fees could give rise to a conflict of interest and noted that the fees should not lead to exorbitant profits. It argued that there needs to be a link between the level of the compensation on the one hand, and the costs and/or the risk on the other, but that it would review this with some degree of deference. Finally, the court found a legal basis for the review of the fees in the requirement that the claimant organizations need to be sufficiently representative and that the interests of the claimants need to be adequately represented from a substantive point of view.
The court therefore reviewed the fees paid to the claimant organizations, based on the information given during the trial, which is summarized in the table below.
|
|
VEB | Deminor | FortisEffect | SICAF |
| Fees | €25M | €10,5M | €7M | €2,5M |
| Succes fee | / | €35M | €3,5M | €40-45M |
| Costs | €7M | €12,9M | €5,7M | €4M |
| Litigation funding? | No | Partially | Yes | Yes |
The four claimant organizations exemplify the wide range of different funding models available in the market. For example, Deminor operates on a commercial basis, while SICAF, FortisEffect and VEB do no. In addition, while some of the organizations were specifically constituted for the Fortis case only (SICAF and FortisEffect), VEB and Deminor have operated (and probably will operate) in many other collective proceedings. Finally, while some of the claimant organizations (FortisEffect, SICAF and Deminor) work with success fees and external litigation funders, VEB has neither and finances the litigation with its own means, which it accumulates through annual membership fees and from fees received in other collective proceedings.
The court concludes that the fees paid to the claimant organizations are significantly higher than the organization’s costs. However, the court also considers that financing collective proceedings is societally useful and should therefore be adequately compensated. The use of external litigation funders also implies that a commercial profit will be demanded to compensate for the risks of the proceedings. In the end, the court concludes that the fees paid to the claimant organization are not unreasonable, given the high costs of financing the litigation and the significant risks of the proceedings, and considering that there was no evidence that the amount of fees paid to the claimant organization had an impact on the compensation for the claimants.
It should be noted, however, that the court only mentions this in a general manner, without discussing the empirical evidence regarding similar legal suits and without making any calculations of the returns of claimant organizations, even though information on both aspects was provided by the claimant organizations. The court merely noted that it felt more comfortable now about the conclusion that the fees are reasonable, thanks to the transparency provided about the costs, the profits and the business models of the claimant organizations.
The equality between active and non-active claimants
A second important element in the court decision was the equality in compensation between active and non-active claimants. In the previous ruling, the court had decided that the fact that active claimants were paid a compensation that was about 50% higher was not objectively justified. The court rejected the argument that active shareholders should be paid a premium to remedy a free rider problem (see the previous blogpostfor more detail). The only difference that would be allowed would be a difference that reflects their different costs, which needs to be substantiated.
The revised settlement agreement in principle no longer distinguishes between the active and non-active claimants in the primary amount of compensation that each will receive. However, the settlement agreement did award the active shareholders a “cost addition” of 25% of the primary amount of compensation. The claimant organizations argue that this a compensation for the additional costs suffered by the active claimants. More specifically, the 25% increase compensates claimants for the success fee (usually 20%) that they have to pay to the claimant organization.[1]
The court accepts that the 25% cost addition is objectively justified. It considers a 20% success fee as reasonable and consistent with market practice, and also believes that the 25% cost addition is a reasonable estimate of the costs that were made by those persons that initiated legal proceedings themselves.
However, the problem is that not all claimant organizations demand an equal success fee. While Deminor, FortisEffect and SICAF demand a success fee between 20 and 25%, VEB does not demand any success fee. In addition, FortisEffect has lowered its success fee to 10% because of the success of the collective proceedings, and Deminor has waived the success fee for non-professional investors.
The court considers that this is not a problem for FortisEffect and Deminor. It decides that the additional compensation is not a consequence of the cost addition being too high, but follows directly from the generous decision of the claimant organization.
However, the court does consider this problematic for the claimants associated with VEB: the cost addition that they receive heavily overcompensates their real costs, because they only pay a membership fee VEB of €60 or €75 per year. During the trial, VEB signaled that is was not willing to amend the settlement agreement on this point. The claimant organizations also argued that it would be impossible to determine the costs of each claimant on a case by case basis, but the court rejected this argument vis-à-vis VEB, as the members of VEB should just have been excluded from the cost addition.
The court concludes that it cannot declare the settlement agreement binding towards VEB, as this would give a perverse incentive to VEB, which could use the overcompensation as a marketing tool to attract future claimants. However, the court concludes that the claimant organizations are collectively sufficiently representative and that the settlement agreement can therefore be declared binding as a whole. This means that there does not seem to be any consequences to not declaring the settlement binding towards VEB: all shareholders will receive compensation, even the members of VEB.
From a judicial policy point of view, this is a smart move from the court. On the one hand, the court does not withhold “justice” for all claimants because of problems with one group of claimants being overcompensated. On the other hand, it avoids setting a precedent that would allow members of a claimant organization to be overcompensated by signaling to VEB that it will not declare such a settlement agreement binding in the future. Nevertheless, from a legal point of view, one can question whether the conclusion from the court is sound.
General conclusions
From the decisions of the court in the Fortis case, we can draw several general conclusions. First, it is clear that the Dutch courts will not accept that claimants associated with a claimant organization will be treated more favorably. We knew this already from the first decision in the Fortis case, but the second decision has shown that the court is willing to be somewhat lenient on this point: the differences in the success fees were not problematic, the fact that some claimant organizations waived the success fee was not problematic, and the overcompensation for VEB claimants did not have any real consequences in the end.
Some critical questions can be raised, however, with regards to this aspect of the court decision, and especially the fact that VEB is singled out. In what way is what VEB did by not asking a success fee ex ante different from what Deminor did by waiving its success fee ex post? Isn’t this functionally the same? The court considers the decision of Deminor as a generous one, but isn’t Deminor (as a commercial organization) equally motivated by the desire to attract future claimants? And what would the court’s decision have been if Deminor would have received a fee that is (for example) €10 million higher, and would have used this to waive all of the success fees? Is this still a generous decision, or is this using Ageas’ money to overcompensate your own claimants to attract claimant’s future business?
This points towards the conclusion that the court should have perhaps been more strict and demanded a cost addition structure that is more tailored to the cost structures of the different claimant organizations, to avoid certain groups being overcompensated. In addition, perhaps the court should have prohibited claimant organizations to waive their success fees, or should have reduced the fees that claimant organizations were paid by Ageas accordingly.
In the end, the question is whether the “fees” received by the claimant organizations (including the indirect benefits of overcompensating their members) are adequate, which brings me to my second conclusion. Both decisions in the Fortis case show that the court has assumed the competence to review the fees paid to the claimant organization. However, the decisions also show that the court is reluctant to exercise this competence, as it only mentions in abstractothat the fees are reasonable given the risky nature of the proceedings. The court only demands transparency from the claimant organizations, which is why the court blocked the settlement in the first decision, but not in the second.
An important explanation for this limited judicial interference is that there is currently no case law or theory about what amounts to fair compensation for claimant organizations in collective proceedings. The second decision has made clear that the fees can definitely be higher than the costs, as all of the claimant organizations, and especially VEB and Deminor, seem to be making a hefty profit. In addition, the court mentions that the fees can reflect the risks of the proceedings. On the other hand, when discussing the financing model of VEB, the court criticizes VEB for using an interest rate that is used in the market by external litigation funders, because unlike them, VEB does not have making profit as a goal.
I believe that this reasoning is fundamentally flawed. VEB’s for-profit or non-profit character should not influence the level of fees that it should get. Deciding otherwise would give for-profit claimant organizations an unfair advantage over non-profit organizations. It would also give a perverse incentive to organizations like VEB to use external litigation funders, as then a higher fee would be justified, as for example Deminor has done. In other words, there seems to be no reason for singling out VEB. Perhaps the fees of the other organization should also have been scrutinized more closely, and the court should have actually engaged with the evidence on similar transactions and on the claimant organization’s rates of return to determine whether the fees were fair.
My conclusions above also suggest a problem with the institutional design of collective proceedings in the Netherlands. Because the court could only either approve the settlement in its entirety or reject the settlement in its entirety, the court was reluctant to hold the deal hostage over a discussion about fees, especially because it would have been the second time. If instead the court had been able to lower the fees for the claimant organization(s) without blocking the settlement, it would probably have been more willing to review the fees. This is also the rule for class actions in the United States, where courts rule separately on the fee requests by the lawyers and on the approval of the settlement.
In conclusion, the decisions in the Fortis case show that more legal scholarship in collective proceedings is highly needed. Especially the topics of equal treatment of claimants and the determination of the fees for claimant organizations are ripe for more elaborate theory-building.
PhD researcher at the Jan Ronse Institute (KU Leuven)
[1]To show the math behind this: if you want to ensure that a claimant receives a net amount of 100, and he needs to pay 20% to his claimant organization, you need to pay him a gross amount of 125, or an increase of 25%.
Corporate Finance Lab 